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Why the Economist is wrong on gold

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When reading the financial press, the amount of coverage one sees on the topic of precious metals, is almost nonexistent. Most pundits don’t care for the metal, nor do they understand it. In fact, former Federal Reserve Chairman Ben Bernanke told Congress that he doesn’t understand gold.

Yet, when you read articles on gold from media pundits, all one hears is negativity about why you shouldn’t invest in the yellow metal. The best example of this is a recent article I read in the Economist. It is called, Russia is buying gold, but few others are. This article claims that despite the low interest rate, easy money environment, combined with the fact that half the gold mining companies are generating negative cash flows, gold is still stuck at a stagnate price of $1200 per ounce. The economist claims, that this is due to the fact that no one is buying the yellow metal, except for Russia. They end the article by stating that gold has lost its luster to real estate, bitcoin, and contemporary art.

I believe the Economist only views gold from a short time frame from the year 2011 to 2015. People claim that gold has declined due to weak fundamentals. I believe it has declined for different reasons. I am going to debunk some of the facts cited by the Economist, make my case for gold, and explain why I believe gold declined from the year 2011 till now.

The first reason I believe the gold price has decreased from over $1900 an ounce, to roughly $1200 an ounce, is because gold was due for a normal market correction. From 2001-2011, the price of Gold increased every year. The price of gold increased from roughly $250 an ounce, to over $1900 an ounce. Any upward move such as that will certainly be followed by a long and sharp correction. That is just the normal nature of markets.

The Economist is also incorrect when it states that only Russia is buying Gold. Currently, China buys more gold than the world produces. Now most gold bulls believe that consumption exceeding production will ultimately lead to a price increase, but the problem with that assumption, is that you can’t analyze gold production and consumption levels, like you would oil or coppers. This is due to the fact that when gold is produced, it’s not consumed like oil, and that all the gold produced stays above ground. This means that all Gold purchased, will eventually be resold into the market at a later date. As a result, Gold production metrics won’t have a similar affect on the price of gold, as it would on oil, copper, or other consumption based commodities.

In terms of the Economist’s theory on new alternatives to Gold, I believe they are incorrect based on past history. Real Estate has always been available for people to own in the US. In fact, George Washington was a land speculator. In terms of art investments, people have been investing in art for hundreds of years, and art prices have been in a current upward trend since the 1950s. When it comes to Bitcoin, the price of Bitcoin has decreased drastically since its high of $1,200. In reality, that hasn’t proven to be a viable alternative to gold.

I believe the main reason the price of gold has declined since 2011, is because Wall Street investors believe that the economy is in recovery, and that the Fed is going to raise interest rates. When people believe interest rates are going to rise, non-yielding assets such as gold become less attractive to investors.

This incorrect Wall Street assumption is why I believe gold will become relevant again. What Wall Street is ignoring is the recent data that has been released lately. In Q1, the gross domestic product (NYSE:GDP) only expanded at .2 percent, the US manufacturing PMI index is reporting its lowest numbers in 16 months, and the ISM manufacturing index is reporting its lowest numbers since May of 2013.

These less than stellar numbers can be attributed to the Federal Reserve’s ending of QE. In my opinion, once Wall Street and the Fed finally admit that the economy isn’t healthy, a rate hike will no longer be considered by the Fed, and quantitative easing will come back into the picture. That will be the catalyst for the next bull market in gold. These actions will cause a huge short covering rally, followed by traders initiating new long positions.

This is why I believe within the next 12-18 months, gold will enter a new bull market.One analyst believes that when it comes to price movements, that $5,000 dollar gold is realistic when looking at historical charts.
http://seekingalpha.com/article/3208426-why-the-economist-is-wrong-on-gold

Sean Hyman: Higher Oil prices on the way

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I Interviewed Sean Hyman from the Ultimate Wealth Report. We discussed oil prices and where they are heading, Sean also talks about oil stocks he likes, then we discussed Gold, an alternative to penny stocks, High Frequency Trading, and more.

Tapering Is Bullish For Gold

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I wanted to address tapering, an end to monetary stimulus, and what it means for gold. In 2013 the price of Gold suffered its worst year since 1981. The general consensus on why gold crashed was because of the Fed’s forward guidance stating the US economy is on the verge of recovery, with government data supporting an economic recovery, which will ultimately lead to the end of monetary stimulus, followed by interest rate normalization.

In terms of fundamentals, none of the fundamentals that lead to a rise in gold from 2003-2011 have changed. When stating this, most people would think I’m crazy, partially because I am ;), but mainly because when one invested in gold, the decision was made because the Fed was printing money, and that the price of gold would rise because of the continuous injection of monetary stimulus. But what those people forget is that Gold is money, and the reason the US is printing money is because it’s insolvent. If interest rates were to rise to a fair market value, the interest on government debt would greatly exceed government revenue, thus leading to a national default on its financial obligations. That is why analyst have said if you believe in math buy gold.

I will admit if the Fed stopped easing, printing money, providing monetary accommodation, whatever you want to call it, that would cause a knee jerk reaction, and create selling pressure, thus reducing the spot price of precious metals. But the reality is, if they completely ended stimulus, slowly at a gradual pace, or quickly, interest rates would inevitably spike, thus causing sovereign debt crisis, which will ultimately lead to a default in the US treasuries market. This would then create a mad panic rush into monetary alternatives to the US dollar, and the strongest alternative to fiat currencies for the past 5,000 years was, is, and most likely always will be, Precious Metals.

I admit I don’t think the Fed will end stimulus, in fact I believe they will reverse the tapering, or come out with a much larger stimulus program in the future; but even if they ended stimulus, the gold fundamentals are still strong because of all the debt in the system, and because it is an alternative to the paper money system we are presently stuck in.

The Economy, Recession, Depression, or bump in the road

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Currently, the unemployment rate is at 9.1%. However, the official unemployment rate doesn’t include the underemployed, part time workers looking for full time work, and people who have voluntarily left the work force, because they’re unable to find work. An Under employed worker is one that’s working a job which is below his or her skill set.

People are saying last month’s job report is just a hiccup on the road to recovery, and it is only natural that a disappointing jobs report would follow after such a positive one in April. But April’s job report wasn’t really as positive as the media portrayed it.

Regardless of what the mainstream press tells you, things are not looking good. Right now our economy is based upon consumer spending, with a consumer that’s broke. Student loan debt, credit card debt, mortgage debt, state and local government debt, as well as federal government debt is astronomically high. This economy can’t sustain itself, we are broke, we can’t spend anymore money.

In order to turn around this economy, we need to fundamentally restructure it back to a goods producing economy, like what we use to have.

Unfortunately in order to do that, things have to get worse before they get better. The service sector, particularly finance, the public sector, higher education, and the retail sector have to contract first, in order to have a real recovery take place. After these sectors contract, we then have to create goods producing jobs such as mining, Oil and gas, Manufacturing, etc. That’s what we need to do to turn around this economy, and it can’t be done overnight without some pain.

What people fail to realize is that, Jobs per say don’t grow an economy, its goods producing, productive jobs that grow an economy.

What I think this means for the stock market is that the free market forces are calling for an economic contraction, and deflation, but unfortunately Ben Bernanke thinks deflation is evil, and wants to fight it. According to Bernanke cheaper prices at the store are bad, but 4 dollar a gallon gas prices are just awesome. So I don’t think a 2008 stock market crash is likely, because at any sign of deflation, I think the Federal Reserve will inject as much liquidity into the market as possible to keep the stock market afloat.

But the market has a weird way of doing things, and some say that the credit contraction is going to be much greater than the money supply increase. I don’t believe so, but just in case you’re worried about a 2008 crash happening again, I would recommend you hedge yourself with these two inverse ETF’s.

I recommend the inverse financial etf (symbol FAZ), because I think the financials are going to be the first sector to go bankrupt due to inevitable higher interest rates, and the inverse small cap ETF (symbol TZA), because generally speaking, the small caps get hit harder than the large caps during a market crash, so you would make more money off these ETF’s in a crash.

In closing, here’s some statistics for you about the US economy. Over 500 wealthy Americans have become expats in the first quarter of this year. Over 70% of Wealthy Americans have moved 1/3 of their money out of the US and say they will be investing in China, India, and or brick countries.
When a country has a system with high taxes, and high regulations, this is what happens, the wealthy leave and go to where they are welcomed. Capital goes to were its treated the best, and Obama is downright hostile towards it.